Importance of the HSN code

The Harmonised System of Nomenclature (HSN) was developed by the World Customs Organisation (WCO) and has become the global standard for naming and categorising over 5,000 products.

The HSN code system forms the backbone of goods classification under India's GST regime. As a business owner or tax professional in India, knowing the HSN code list is crucial for proper tax compliance and international trade. Read on to know more about this system of classification.

What is HSN code?

What is an HSN code in simple terms? It is an internationally standardised system that serves as a universal economic language and coding system to identify products across global markets. The HSN number provides a framework for categorising products, making it easier to determine applicable tax rates and facilitate cross-border commerce.

The HSN code system allows businesses to correctly identify their products for taxation purposes. Additionally, the HSN code list eliminates confusion and discrepancies that might arise from language differences or varying product descriptions across different markets. Essentially, mastering the HSN code search process is important for businesses of all sizes operating in the Indian market.

The code HSN system comprises 21 sections, 99 chapters, 1,244 headings, and 5,224 subheadings. This creates a comprehensive structure that covers virtually all commercially traded goods.

Let's understand what is HSN code in GST and how it works.

How does HSN work?

The HSN code system operates on a hierarchical structure that becomes more specific with each additional digit.

The first two digits represent the chapter, which identifies the broader category of goods. The next two digits denote the heading, which narrows to a specific product type within that chapter. Subsequent digits provide even more detailed classification, drilling down to the specific product level.

For instance, when conducting an HSN code search for cotton T-shirts, you would find the code HSN 6109. Here, the first two digits (61) represent "Articles of Apparel and Clothing Accessories, Knitted or Crocheted," while the next two digits (09) specifically identify "T-shirts, singlets, and other vests, knitted or crocheted."

The beauty of the HSN number system lies in its universal applicability. Whether importing goods into India or exporting to international markets, the classification remains consistent.

Importance of the HSN Code

Understanding the HSN code in GST is crucial for several reasons:

• First, it ensures compliance with GST regulations by helping businesses accurately determine the tax rate applicable to their products.
• Second, with the correct HSN code, companies can avoid underpaying or overpaying taxes, both of which can lead to complications with tax authorities.
• The HSN code list also facilitates smoother international trade by providing a common language for product classification across borders. This standardisation reduces confusion during customs clearance, speeds up the process, and minimises the risk of goods being incorrectly classified.

For businesses operating in India, knowing the right code for their products simplifies invoice preparation and GST return filing. It also makes it easier to track and analyse sales data, as products are consistently categorised using the same codes.

Additionally, the HSN number system helps maintain uniformity in product descriptions across different departments, ensuring everyone speaks the same language when referring to specific items.

Example of HSN code

Let's explore some practical examples to understand what an HSN code is in action. Consider a company that manufactures and sells various types of footwear. Different types of footwear would have different HSN code classifications:

• Leather footwear: HSN number 6403.
• Sports footwear with rubber soles: HSN code 6402.
• Footwear with textile uppers: Code HSN 6404.

Each of these codes provides specific information about the product. For instance, the HSN code 6403 for leather footwear falls under Chapter 64 (Footwear, gaiters and the like; parts of such articles), with the subsequent digits narrowing down to leather footwear specifically.

Similarly, if you're dealing with electronic goods, a smartphone would have the HSN code 8517, while a laptop computer would be classified under code HSN 8471. Performing an HSN code search for these products would reveal their specific classification and applicable GST rates, making tax compliance straightforward.

Structure of HSN codes in India

In India, the HSN code structure consists of 8 digits, providing a detailed classification system for goods. The hierarchical structure breaks down as follows:

• The first two digits: Chapter number (broad category).
• The next two digits: Heading number (product type).
• The next two digits: Sub-heading.
• Final two digits: Tariff item.

This 8-digit HSN number system allows for precise categorisation of goods, ensuring accurate tax assessment and regulatory compliance. However, not all businesses are required to use the full 8-digit code.

India's GST 2.0 regime has changed HSN reporting to make it easier, more standardised, and more conducive to digital filing.

• If your turnover is ₹5 crore or less, you must use a 4-digit HSN code.
• If your turnover is more than ₹5 crore, you are required to use a 6-digit code.
• On imports and exports, the complete 8-digit HSN code must be used, as per Customs Tariff norms.

The previous exemption for companies with a turnover under ₹1.5 crore to avoid HSN codes is gone. The aim is better reporting and more accurate e-invoicing—no exemptions.

HSN code list for GST India

The HSN code list for GST in India categorises goods into different chapters and headings, each assigned a unique code. This comprehensive list aids businesses in accurately classifying their products for GST compliance, ensuring consistency in tax calculation and simplifying documentation.

The code HSN list is divided into 21 sections, with chapter ranges covering various categories of goods. For example:

• Section I (Chapters 1-5): Live animals and animal products
• Section XI (Chapters 50-63): Textiles and textile articles
• Section XVI (Chapters 84-85): Machinery, mechanical appliances, and electrical equipment

Each section contains specific HSN number ranges with corresponding GST rates (0%, 5%, 12%, 18%, or 40%). For instance, textile articles under Section XI have an HSN code range of 5001-6310, with GST rates varying from 0% to 18% depending on the specific product. GST 2.0 is more than new regulations. GST 2.0 also adds real-time HSN auto-validation on the GST portal and via the e-invoicing platform. Your HSN codes are checked in real-time by the system, comparing them with the official CBIC list. No longer doubt.

How to check GST return status?

After filing your returns with the correct HSN code classifications, you should ensure they've been processed successfully. To check your GST return status:

• Log in to the GST portal using your credentials.
• Navigate to the 'Returns' tab.
• Select the 'Track Return Status' button.
• Choose the relevant financial year and return period.
• View the status of your return.

For businesses seeking streamlined GST payment solutions, Axis Bank offers comprehensive GST Payment facilities for both retail and corporate customers. These services complement your HSN code compliance efforts by providing efficient tax payment solutions that integrate seamlessly with your business operations.

How to avoid mistakes with HSN in GST?

To avoid errors when using the HSN code list for GST compliance, consider these best practices:

• Thoroughly understand your product: Before assigning an HSN number, ensure you fully understand the composition, manufacturing process, and intended use of your product.
• Consult official resources: To verify classifications, use the official HSN code search tools and guidance provided by the GST Council or tax authorities.
• Train your staff: Ensure that all relevant team members understand the HSN code in GST and how to classify products correctly.
• Implement checks and balances: Create a review process where multiple team members verify code HSN assignments before finalising invoices or returns.
• Stay updated: GST rates and HSN code classifications may change over time. Check for updates and amendments regularly.
• Maintain detailed records: Keep comprehensive documentation of your HSN code classification decisions, including any clarifications received from tax authorities.
• Seek professional advice: When in doubt about an HSN code classification for complex products, consult with a tax professional or GST expert.
• Built-in HSN Code: A built-in HSN auto-suggest facility can also be found in the new portal. Use it. It avoids incorrect classification and minimises clerical errors.

Conclusion

Understanding what is HSN code is fundamental for businesses operating under India's GST regime. The HSN code list provides a standardised framework for classifying goods, ensuring consistent tax application, and facilitating international trade. By mastering the HSN code search process and correctly implementing these codes in your business operations, you can streamline compliance, reduce errors, and avoid potential penalties.

At its core, GST 2.0 places greater stress on digital verification and automation than ever. Proper HSN classification is not just a courtesy—it's now essential for compliance. The hierarchical structure of the code HSN system, from chapters to specific tariff items, offers a comprehensive framework that accommodates virtually all commercially traded goods. This universality makes it an invaluable tool for businesses engaged in both domestic and international commerce.

Remember that accurate HSN number classification is not merely a regulatory requirement but also a business advantage. It enables precise tax calculation, simplifies documentation, and supports efficient inventory management.

Frequently Asked Questions

Is the HSN code 6 digits or 8 digits?

The HSN code can be either 6-digit or 8-digit, depending on the context. Internationally, the standard HSN number is 6-digit, as established by the World Customs Organisation. However, in India, an 8-digit system is used for greater specificity, with the last two digits added to provide more detailed classification.

Is the HSN code mandatory in GST invoices?

Yes, including the HSN code on GST invoices is mandatory in India, but the requirement varies based on annual turnover.

What is the difference between an HSN code and a SAC code?

The main difference between the HSN code and the SAC code lies in their application. The HSN code is used to classify goods or tangible products under GST. In contrast, SAC (services accounting code) is used to classify services. While the HSN code list helps identify physical products for taxation purposes, SAC codes perform the same function for services.

What are the HS and HSN codes?

HS (harmonised system) and HSN code (harmonised system of nomenclature) refer to the same classification system. The 6-digit codes used worldwide for customs and shipping are commonly referred to as HS Codes, while in India, they're known as HSN number codes. India initially adopted the 6-digit international standard but later added two additional digits for greater specificity, creating an 8-digit classification known as the ITC-HS code (Indian trade classification based on the harmonised system of coding).

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Tax and GST regulations are subject to change. The information in this article is based on applicable laws, rules, notifications, and interpretations in force as on the date of publication and may change due to amendments, judicial decisions, or regulatory updates.